Investing to Make a Difference Is Gaining Ground

IF there is a traditional path to becoming an impact investor, it is the one taken by David Keller, who made a lot of money at a young age and retired from Cisco Systems in his 40s in 2002.

Mr. Keller got the idea of starting a family foundation and wondered if he could do more good by putting some of the foundation’s money in investments that would have a positive social impact.

“With a modest family foundation, I knew I wasn’t going to change the world,” Mr. Keller, now 60, said. “The whole idea of combining my values with investment returns made a lot of sense in the context of just small grant-making. I wanted all of it to work together.”

Twelve years later, 10 percent of his wealth is in so-called impact investments — those made in companies, organizations and funds with the intention of generating a measurable, beneficial social and environmental impact.

While these investors are also seeking a financial return, the kinds of private investments Mr. Keller has made — as in Generation Investment Management co-founded by Al Gore and David Blood — tend to be risky in the same way other private equity investments are and less liquid than investments in public companies.

But interest in impact investing, which has been around for more than a decade, is growing and changing. According to the Forum for Sustainable and Responsible Investment, some $3.74 trillion, or 11 percent, of total United States assets under management were placed in sustainable investments in 2012. This was a fivefold increase from 1995.

Financial firms have followed the money and are expanding what they offer to impact investors. Last year, Morgan Stanley started the Institute for Sustainable Investing with a goal of having $10 billion in client assets invested for social and environmental impact within five years.

Last month, Bank of America Merrill Lynch sold $12 million worth of “green bonds” from the World Bank, with a minimum investment of just $1,000. The proceeds are being used to fund projects like alternative energy programs.

And HIP Investor, which rates companies and municipal bonds on their societal impact, has started rating company 401(k) plans based on the sustainability ratings of their underlying investments. Of course, financial firms aren’t doing this for purely altruistic reasons.

“We fundamentally believe that considering the sustainability and impact of your investments is a business opportunity for us and our clients,” said Audrey Choi, chief executive of Morgan Stanley’s Institute for Sustainable Investing. “We also think it’s a fundamentally strong value proposition to integrate thinking about large global issues into your investing decisions.”

Or as Andy Sieg, head of global wealth and retirement solutions at Bank of America Merrill Lynch, put it: “We think impact investing is an idea whose time has come in mainstream wealth management.”

But as impact investing grows and the minimum amount needed to invest decreases, the path is becoming more like the one Jennifer Anderson took. A former investment adviser at SEI Investments, Ms. Anderson has worked since 2008 as a consultant to companies that want to do business in a more sustainable way. Yet it was only in the last year and a half that she felt comfortable enough with the investment products to begin putting her own money into them.

“There are now more options, transparency and information available,” said Ms. Anderson, 41, a co-founder of Sustrana, a sustainability consultancy outside of Philadelphia.

She has taken all of the money locked up in retirement accounts from previous jobs — less than $1 million — and invested it in companies that are addressing the risks climate change poses to doing business in the future. “I want to do something that will have an impact and that I’ll feel good about,” she said.

Such enthusiasm about an investment approach that has no accepted benchmark and, for the most part, still requires large minimums and long holding periods might seem frothy. And few people talk of impact investments’ ability to outperform investments made with an eye solely on a company’s profitability. (That’s because they generally don’t.)

But the problems the impact investments are trying to address, like clean drinking water or health concerns, are real to anyone following the Ebola outbreak in western Africa.

How should someone proceed who wants a solid return and is generally interested in doing good with her investments but not zealous about a cause?

The first rule of thumb is to go slowly. Mr. Keller said he felt that he probably missed some investments by being overly cautious, but at the same time he had no regrets and his portfolios continued to perform well.

“I viewed this as trying to move the industry by my own small demand. That made it more comfortable to take a patient approach and not panic if I had investments that weren’t aligned with my mission.”

The second rule is to find a guide, often in the form of an adviser similarly interested in impact investing.

“I didn’t always have people who were necessarily onboard with what my intentions were,” said Patricia Rouen, 65, who has been focused on impact investing for 15 years. “They were more or less humoring me. I realized I needed to find the investment professional who totally supported what I was doing.”

For Ms. Rouen, who lives in Hawaii, it helped to define how her investment and life views were going to mesh. Like many, she started by screening out traditional energy and oil companies and replaced them with clean energy alternatives. But over time she realized she needed to broaden her view to companies that might not seem green but were operating in a way that was better than their peers.

Coca-Cola is an example of this kind of strategy. To some investors, the company sells calorie-laden sugary drinks around the world; to others it is a company that understands the need for clean water and is working to protect water sources.

And that leads to the need to be expansive in the way people, particularly those with less wealth, assess impact investments. R. Paul Herman, chief executive of HIP Investor Ratings and president of HIP Investor, said his firm recently began assessing 401(k) plans for their sustainability ratings. He said having rated 4,500 companies and 4,000 municipal bond issues, the firm was able to assess the underlying assets owned by the plans.

These ratings are “a way to have the broadest definition of impact that is meaningful to you,” he said. “Every investment has a sustainability or impact profile.”

While the companies and municipal bond issues are rated for obvious metrics, like carbon usage and water efficiency, they are also screened for criteria like employee turnover, chief executive pay, board diversity and legal issues. By these measures, Novo Nordisk, the pharmaceutical company, ranks high, while Berkshire Hathaway, Warren Buffett’s investment vehicle, ranks low as much for some of its holdings as its hands-off approach to managing the companies it owns stakes in.

Of course overlaying all of these impact investments is the returns. They vary depending on how an investor defines the impact investments, from screening out certain companies all the way up to making direct investments in cutting-edge companies.

But there is generally a trade-off. Steven Tiell, 36, a technology executive at Accenture, said four years ago he and his wife decided to invest their savings with an impact focus.

“We can’t say this portion of our portfolio can just do good,” he said. “We’re still building wealth. We needed it to grow over time.”

He said they had achieved growth through traditional investments in stocks and bonds but also through tailored exchange-traded funds, like one focused on investing in water.

“If you compared it against the Vanguard Target Retirement Fund over the past three years, my portfolio hasn’t done as well,” he said. “But it still has positive returns that I’m happy with.”

Of course, the bet that these investors are making is that the industry they have chosen is developing and there will be more options for all investors.

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A version of this article appears in print on , on Page B5 of the New York edition with the headline: Investing to Make a Difference Is Gaining Ground. Order Reprints | Today’s Paper | Subscribe